Fine tuning income around the ACA cliff

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curmudgeon
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Fine tuning income around the ACA cliff

Post by curmudgeon » Mon Sep 10, 2018 9:35 pm

Does anyone have specific thoughts or advice on managing MAGI near the ACA cliff? How much margin for error would you feel you need? Going even $5 over the $64960 MAGI (4x the federal poverty level for two people) would cost us about $15,000 in ACA subsidy payback. It's a lot more painful than just missing a marginal tax bracket.

We are fortunate to have access to a variety of sources for our cash flow needs in retirement, so we do have a number of knobs that we can tweak. For folks with self-employment or other irregular income it could be a lot more complex. For us, we have the two conflicting priorities of staying under the ACA cliff, and doing Roth conversions.

Last year I still had some employment income, but we came in under the cliff with a bit to spare. I maxed 401K, HSA, and IRA, but our state tax refund from prior year would have put us over the cliff. After a bit of panic, I realized we could do a spousal IRA for my wife, and an additional $1K of HSA catch-up into a separate HSA for her, which saved us a bunch of money on the ACA premium side.

This year I won't have some of those levers, so I'm trying to calculate closely. With an assortment of stocks, mutual funds, and fixed income instruments in taxable, and interest rates increasing, there will be a lot of bits and pieces to our income. Some of these (like t-notes bought at a discount) are new to me. So far I'm planning the following:

1) Split my Roth IRA conversion into a main block now, with the last $5K or so done in late December after I have a better picture on the income side.

2) Track all my interest-paying accounts and add them up with their interest-to-date in December (and allow for anything still due to come in)

3) Track all the dividend payments to date in December, allow for anything else still to come. This can be a little tricky with some funds, particularly foreign ones.

4) Watch out for any unexpected cap gains distributions; unnoticed mergers or buyouts can sometimes trigger these.

5) Add in any cap gains or losses during the year. I haven't always bothered to tax-loss harvest, but I did some this year.

6) Compare to last year's tax return to make sure I haven't missed something.

7) Set up a final Roth conversion which would take me to my target MAGI. Hopefully any major corporate actions and cap gains distributions will have settled by then, but I think I won't do this until the week between Christmas and New Years.

I think I will leave myself at least $3K of margin between my estimated MAGI and the ACA cliff, at least for this year. I'd be really annoyed with myself for going over inadvertently. I'm not aware of anything I can do after the first of the year to unwind any of the income, as we aren't eligible for IRA contributions this year, and I already max the HSA.

Jablean
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Re: Fine tuning income around the ACA cliff

Post by Jablean » Mon Sep 10, 2018 10:28 pm

Sounds to me like you are tracking everything. We are both working and self employed so a lot of variable income. I run a spreadsheet with all my estimates at the start of the year and then adjusted as I get real numbers .

marcopolo
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Re: Fine tuning income around the ACA cliff

Post by marcopolo » Mon Sep 10, 2018 10:43 pm

You seem like you are tracking things pretty closely and have accounted for anything i could think of. The end of year capital gains is a bit of a wild card. So, I think you are right to wait till the last minute to do the Roth conversions. It's too bad we don't get until tax filing time to do conversion like we can with contributions.

I assume you have done the math, and it still makes sense to do the Roth conversion even with the added ~10% tax on top of your marginal bracket?

When I ran I-ORP, it suggests doing little or no Roth conversion (for my scenario) until I hit Medicare age.
Once in a while you get shown the light, in the strangest of places if you look at it right.

curmudgeon
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Re: Fine tuning income around the ACA cliff

Post by curmudgeon » Mon Sep 10, 2018 11:04 pm

marcopolo wrote:
Mon Sep 10, 2018 10:43 pm
You seem like you are tracking things pretty closely and have accounted for anything i could think of. The end of year capital gains is a bit of a wild card. So, I think you are right to wait till the last minute to do the Roth conversions. It's too bad we don't get until tax filing time to do conversion like we can with contributions.

I assume you have done the math, and it still makes sense to do the Roth conversion even with the added ~10% tax on top of your marginal bracket?

When I ran I-ORP, it suggests doing little or no Roth conversion (for my scenario) until I hit Medicare age.
We have a bronze HSA plan, and with the way the ACA numbers work out this year, there is no subsidy hit for additional income as long as it stays under the cliff. Last year there was an income range from about 52K-64K where we would lose the extra 10% out of the subsidy, but not this year (the benchmark plans went up). I'd like to get ~50% of our IRAs converted to Roth before RMD time. It may not happen, but I'm trying to fit as much as I can, even with state tax added in.

I'll have to look a little closer in 5 years when we hit Medicare age because of the different transitions for my wife and I. I'll probably give up the three months worth of subsidy for the year the second of us turns 65 to do more Roth. Though who knows what things will look like then anyway.

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MP123
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Re: Fine tuning income around the ACA cliff

Post by MP123 » Mon Sep 10, 2018 11:09 pm

$3k from the ACA cliff would probably make me a little uncomfortable but it depends on how confident you feel in your projections.

The tax savings from a couple grand in Roth conversions would not be worth loosing the subsidies for.

Sounds like you have a good plan though as long as you don't miss anything. Hopefully your funds will pay their final dividend and cap gains in early December and not on the 31st.

I'd triple check the exact cliff amount too, it's higher in a few states.

Is an unexpected last minute state tax refund a possibility?

curmudgeon
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Re: Fine tuning income around the ACA cliff

Post by curmudgeon » Mon Sep 10, 2018 11:29 pm

MP123 wrote:
Mon Sep 10, 2018 11:09 pm
$3k from the ACA cliff would probably make me a little uncomfortable but it depends on how confident you feel in your projections.

The tax savings from a couple grand in Roth conversions would not be worth loosing the subsidies for.

Sounds like you have a good plan though as long as you don't miss anything. Hopefully your funds will pay their final dividend and cap gains in early December and not on the 31st.

I'd triple check the exact cliff amount too, it's higher in a few states.

Is an unexpected last minute state tax refund a possibility?
How close to the line is a good question, since the wrong answer costs $15k. The loss of ability to do Roth Conversion recharacterizations adds some spice to the situation. Most of my fund payouts should be fairly predictable, with the possible exception of some international.

I planned ahead on the state tax refund issue; I claimed the sales tax deduction last year instead of state income tax. It cost me a few dollars in extra taxes last year, but it saves counting the big refund in a slightly higher bracket this year and gives extra conversion space. Some very helpful advice from folks on this board pointed me towards that option.

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Watty
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Re: Fine tuning income around the ACA cliff

Post by Watty » Mon Sep 10, 2018 11:33 pm

curmudgeon wrote:
Mon Sep 10, 2018 9:35 pm
For us, we have the two conflicting priorities of staying under the ACA cliff, and doing Roth conversions.
Make that three.

It is important to remember that the amount of the subsidy is calculated based on your income and the maximum amount you pay is based on a percentage of your income.
Income less than 133% of poverty = 2.01%
At least 133%, but less than 150% = 3.02% to 4.03%
At least 150%, but less than 200% = 4.03% to 6.34%
At least 200%, but less than 250% = 6.34% to 8.1%
At least 250%, but less than 300% = 8.1% to 9.56%
At least 300%, not more than 400% = 9.56%
https://www.healthinsurance.org/faqs/is ... next-year/


I am in the 9.56% range and I would suspect that you are too. This means that if I do a $1,000 Roth conversion that I pay $120 in federal taxes since I am in the 12% federal tax bracket and I also lose $95.60 in subsidy since I am expected to pay 9.56% of my income in healthcare premiums. That in effect puts me in the equivalent of a 21.56% federal tax bracket. (State taxes will need to be considered too.)

At that rate doing Roth conversions does (edit) not make a lot of sense for me.

I am trying to keep my taxable income as low as possible until we are both getting Medicare and don't need to worry about the subsidy anymore.
Last edited by Watty on Tue Sep 11, 2018 9:21 am, edited 1 time in total.

curmudgeon
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Re: Fine tuning income around the ACA cliff

Post by curmudgeon » Tue Sep 11, 2018 12:08 am

Watty wrote:
Mon Sep 10, 2018 11:33 pm
curmudgeon wrote:
Mon Sep 10, 2018 9:35 pm
For us, we have the two conflicting priorities of staying under the ACA cliff, and doing Roth conversions.
Make that three.

It is important to remember that the amount of the subsidy is calculated based on your income and the maximum amount you pay is based on a percentage of your income.

https://www.healthinsurance.org/faqs/is ... next-year/

I am in the 9.56% range and I would suspect that you are too. This means that if I do a $1,000 Roth conversion that I pay $120 in federal taxes since I am in the 12% federal tax bracket and I also lose $95.60 in subsidy since I am expected to pay 9.56% of my income in healthcare premiums. That in effect puts me in the equivalent of a 21.56% federal tax bracket. (State taxes will need to be considered too.)
You would think so, but ACA has many twists and turns. In my case, the benchmark plans created a subsidy baseline that is several hundred dollars/mo more than my particular plan cost. I could have gotten a "Gold" plan with more subsidy, but that in turn would put me into your 9.56% phase-out, and would also have cost me my HSA option. Given our minimal medical costs, the bronze has worked well for us so far, and a side effect is that by giving up some potential subsidy we don't hit that phase-out (at least this year) to make Roth conversions more expensive. I spent a lot of time playing with calculators and tax software looking at this. It doesn't really make sense, but that's ACA.

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Re: Fine tuning income around the ACA cliff

Post by tfb » Tue Sep 11, 2018 2:08 am

Jablean wrote:
Mon Sep 10, 2018 10:28 pm
Sounds to me like you are tracking everything. We are both working and self employed so a lot of variable income. I run a spreadsheet with all my estimates at the start of the year and then adjusted as I get real numbers .
It's a little easier when you have earned income. Your IRA contributions can be the lever when you wait until the next year. If you need to push the income down you contribute to Traditional; otherwise you contribute to Roth.
Harry Sit, taking a break from the forums.

47Percent
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Re: Fine tuning income around the ACA cliff

Post by 47Percent » Tue Sep 11, 2018 8:32 am

Watty wrote:
Mon Sep 10, 2018 11:33 pm
That in effect puts me in the equivalent of a 21.56% federal tax bracket. (State taxes will need to be considered too.)

At that rate doing Roth conversions does make a lot of sense for me.
I think you meant to say the opposite?!

47Percent
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Re: Fine tuning income around the ACA cliff

Post by 47Percent » Tue Sep 11, 2018 8:40 am

It may not be quite ready this year -- although I have seen a couple of ads for those. But from next year on I expect many fund houses to be offering Opportunity zone qualified investments that allow you to defer cap gains until later years. This is part of the TCJA provisions, but there hasn't been enough time for many investment houses to offer this.

That would allow 180 days from the realization of cap gains to roll it over to this vehicle, and we can skip reporting it in that year.

That should be a great help for this last minute cliff oops, even after Jan 1st.

I am not sure if there would be minimum investment requirements etc. related to that.

harvestbook
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Re: Fine tuning income around the ACA cliff

Post by harvestbook » Tue Sep 11, 2018 8:55 am

We're in a similar boat, likely switching to ACA next year (almost certainly.) We're both self-employed with uneven income. Since this is the expected last year of private insurance, I am either thinking of a huge Roth conversion this year or waiting until 65 and do them over several years. It's annoyingly complex but also benefits people who can be flexible. Lots of math to do before November.

Personally, I'd not want to get too close to the cliff since the risk seems to outweigh the reward.
I'm not smart enough to know, and I can't afford to guess.

47Percent
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Re: Fine tuning income around the ACA cliff

Post by 47Percent » Tue Sep 11, 2018 9:10 am

harvestbook wrote:
Tue Sep 11, 2018 8:55 am
Since this is the expected last year of private insurance, I am either thinking of a huge Roth conversion this year or waiting until 65 and do them over several years.
FYI.. ACA too is comprised only of private insurance options.

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Watty
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Re: Fine tuning income around the ACA cliff

Post by Watty » Tue Sep 11, 2018 9:22 am

47Percent wrote:
Tue Sep 11, 2018 8:32 am
Watty wrote:
Mon Sep 10, 2018 11:33 pm
That in effect puts me in the equivalent of a 21.56% federal tax bracket. (State taxes will need to be considered too.)

At that rate doing Roth conversions does make a lot of sense for me.
I think you meant to say the opposite?!
Thanks for fixing that, I fixed that.

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Watty
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Re: Fine tuning income around the ACA cliff

Post by Watty » Tue Sep 11, 2018 9:25 am

curmudgeon wrote:
Tue Sep 11, 2018 12:08 am
Watty wrote:
Mon Sep 10, 2018 11:33 pm
curmudgeon wrote:
Mon Sep 10, 2018 9:35 pm
For us, we have the two conflicting priorities of staying under the ACA cliff, and doing Roth conversions.
Make that three.

It is important to remember that the amount of the subsidy is calculated based on your income and the maximum amount you pay is based on a percentage of your income.

https://www.healthinsurance.org/faqs/is ... next-year/

I am in the 9.56% range and I would suspect that you are too. This means that if I do a $1,000 Roth conversion that I pay $120 in federal taxes since I am in the 12% federal tax bracket and I also lose $95.60 in subsidy since I am expected to pay 9.56% of my income in healthcare premiums. That in effect puts me in the equivalent of a 21.56% federal tax bracket. (State taxes will need to be considered too.)
You would think so, but ACA has many twists and turns. In my case, the benchmark plans created a subsidy baseline that is several hundred dollars/mo more than my particular plan cost. I could have gotten a "Gold" plan with more subsidy, but that in turn would put me into your 9.56% phase-out, and would also have cost me my HSA option. Given our minimal medical costs, the bronze has worked well for us so far, and a side effect is that by giving up some potential subsidy we don't hit that phase-out (at least this year) to make Roth conversions more expensive. I spent a lot of time playing with calculators and tax software looking at this. It doesn't really make sense, but that's ACA.
I can see how that would be the case if the potential subsidy was large enough to pay more than 100% cost,or is there something else going on?

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Re: Fine tuning income around the ACA cliff

Post by indexfundfan » Tue Sep 11, 2018 9:44 am

Watty wrote:
Mon Sep 10, 2018 11:33 pm
curmudgeon wrote:
Mon Sep 10, 2018 9:35 pm
For us, we have the two conflicting priorities of staying under the ACA cliff, and doing Roth conversions.
Make that three.

It is important to remember that the amount of the subsidy is calculated based on your income and the maximum amount you pay is based on a percentage of your income.
Income less than 133% of poverty = 2.01%
At least 133%, but less than 150% = 3.02% to 4.03%
At least 150%, but less than 200% = 4.03% to 6.34%
At least 200%, but less than 250% = 6.34% to 8.1%
At least 250%, but less than 300% = 8.1% to 9.56%
At least 300%, not more than 400% = 9.56%
https://www.healthinsurance.org/faqs/is ... next-year/


I am in the 9.56% range and I would suspect that you are too. This means that if I do a $1,000 Roth conversion that I pay $120 in federal taxes since I am in the 12% federal tax bracket and I also lose $95.60 in subsidy since I am expected to pay 9.56% of my income in healthcare premiums. That in effect puts me in the equivalent of a 21.56% federal tax bracket. (State taxes will need to be considered too.)

At that rate doing Roth conversions does (edit) not make a lot of sense for me.

I am trying to keep my taxable income as low as possible until we are both getting Medicare and don't need to worry about the subsidy anymore.
Watty, I have been investigating this issue recently and there is another wrinkle if you have foreign tax credit (which is "non-refundable").

I'm in the same state as you and found that when your FTC is not fully used up to offset your taxes, the marginal rate (fed + state) of a Roth conversion is 25% (effectively due to 10% ACA phaseout + 10% tax bracket + 6% state), as you have explained.

But if you have not used up your FTC, the marginal rate is in fact 15% (10% ACA phaseout + 6% state). My goal is to convert enough to use up my entire FTC to offset taxes (provided I don't drop off the ACA cliff).
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curmudgeon
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Re: Fine tuning income around the ACA cliff

Post by curmudgeon » Tue Sep 11, 2018 9:51 am

Watty wrote:
Tue Sep 11, 2018 9:25 am
curmudgeon wrote:
Tue Sep 11, 2018 12:08 am
You would think so, but ACA has many twists and turns. In my case, the benchmark plans created a subsidy baseline that is several hundred dollars/mo more than my particular plan cost. I could have gotten a "Gold" plan with more subsidy, but that in turn would put me into your 9.56% phase-out, and would also have cost me my HSA option. Given our minimal medical costs, the bronze has worked well for us so far, and a side effect is that by giving up some potential subsidy we don't hit that phase-out (at least this year) to make Roth conversions more expensive. I spent a lot of time playing with calculators and tax software looking at this. It doesn't really make sense, but that's ACA.
I can see how that would be the case if the potential subsidy was large enough to pay more than 100% cost,or is there something else going on?
It's just that. The benchmark silver plans for our age/area are expensive enough that the potential subsidy is about 15% above our plans actual cost. Fortunately we have an acceptable HMO (Kaiser) at the lower end of the cost spectrum; the other lower-cost option here is not one that I would want to depend on (essentially an extension of a medicaid provider network).

bradpevans
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Re: Fine tuning income around the ACA cliff

Post by bradpevans » Tue Sep 11, 2018 10:05 am

15,000 is a lot to lose in order to save the differential marginal tax rates in question.
In other words, i'd stay pretty far away from the cliff, like 5K away

47Percent
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Re: Fine tuning income around the ACA cliff

Post by 47Percent » Tue Sep 11, 2018 10:17 am

Watty wrote:
Tue Sep 11, 2018 9:25 am

I can see how that would be the case if the potential subsidy was large enough to pay more than 100% cost,or is there something else going on?
It is because quirk in a way the prices are set -- not fully in the control of the insurance companies.

The subsidies are based on the silver plan prices. And not all plan prices go up the same way -- as illogical as it may sound.
So for people with subsidies, bronze became essentially free even close to the cliff.

Please google for the New York Times article by searching for "When Silver costs more than the gold".

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Re: Fine tuning income around the ACA cliff

Post by AzSkier » Tue Sep 11, 2018 10:34 pm

How much margin for error would you feel you need?
Last year was my first time filing taxes with ACA income considerations. I gave my self a $2000 buffer to account for any mistakes I might make. I have been filing my own taxes for 30+ years (turbo tax, HR block) and generally know what I am doing. (Ha!)

I did a practice tax filing last December(2017) to figure out how much I needed to pull from an inherited IRA to get my income to $62000. I estimated MF and ETF distributions before they were deposited in my account (which happens very late in December).

I thought I had done every thing exactly correctly.

In January, I started doing my 2017 taxes, and I just couldn't believe the mistakes I made only 1 month earlier. I had the various 1099s and there were things that I simply forgot or was unaware of. The end result was I came within $100 of the cliff. That was nerve racking.

My 2017 subsidy was $6K. This year, my subsidy is $14K. Even though I now know so much more (HA, HA), I will be giving myself a $6K buffer.

The real question is "Do you feel lucky, Punk". As in how much in tax savings are you willing to win while you risk $15K?

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Re: Fine tuning income around the ACA cliff

Post by GuineaPig » Tue Sep 11, 2018 11:02 pm

AzSkier wrote:
Tue Sep 11, 2018 10:34 pm
How much margin for error would you feel you need?
Last year was my first time filing taxes with ACA income considerations. I gave my self a $2000 buffer to account for any mistakes I might make. I have been filing my own taxes for 30+ years (turbo tax, HR block) and generally know what I am doing. (Ha!)

I did a practice tax filing last December(2017) to figure out how much I needed to pull from an inherited IRA to get my income to $62000. I estimated MF and ETF distributions before they were deposited in my account (which happens very late in December).

I thought I had done every thing exactly correctly.

In January, I started doing my 2017 taxes, and I just couldn't believe the mistakes I made only 1 month earlier. I had the various 1099s and there were things that I simply forgot or was unaware of. The end result was I came within $100 of the cliff. That was nerve racking.

My 2017 subsidy was $6K. This year, my subsidy is $14K. Even though I now know so much more (HA, HA), I will be giving myself a $6K buffer.

The real question is "Do you feel lucky, Punk". As in how much in tax savings are you willing to win while you risk $15K?
I have a similar story -- two years ago, I had maxed out my 401k contribution and my tIRA. Being a cautious sort, I had left some buffer. It was a good thing, because it turned out that I wasn't allowed to make a full full tIRA contribution (I wasn't aware of the tIRA MAGI limit). Fortunately, I some of my tIRA contribution was still deductible and I limboed about $1,000 under the ACA limit.

The following year, I made sure to sign up for an HSA. I also make sure my wife and I make the max I bond purchase each year (the interest income we get from them are all tax deferred), and I persuaded my wife's employer to set up a SIMPLE IRA at her work. Even so, I am nervous about the losing the ACA subsidies by passing the cliff.

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Watty
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Re: Fine tuning income around the ACA cliff

Post by Watty » Wed Sep 12, 2018 12:05 am

47Percent wrote:
Tue Sep 11, 2018 10:17 am
Watty wrote:
Tue Sep 11, 2018 9:25 am

I can see how that would be the case if the potential subsidy was large enough to pay more than 100% cost,or is there something else going on?
It is because quirk in a way the prices are set -- not fully in the control of the insurance companies.

The subsidies are based on the silver plan prices. And not all plan prices go up the same way -- as illogical as it may sound.
So for people with subsidies, bronze became essentially free even close to the cliff.

Please google for the New York Times article by searching for "When Silver costs more than the gold".
You can also search for "silver switcheroo" which my state unfortunately did not do.

Random Poster
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Re: Fine tuning income around the ACA cliff

Post by Random Poster » Wed Sep 12, 2018 8:04 am

curmudgeon wrote:
Tue Sep 11, 2018 12:08 am
I spent a lot of time playing with calculators and tax software looking at this.
Could you recommend which calculators you used?

Or, alternatively, a comprehensive resource that explains all of the details of the various ACA offerings, the tax implications of each, and how to make sense of it all?

curmudgeon
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Re: Fine tuning income around the ACA cliff

Post by curmudgeon » Wed Sep 12, 2018 9:45 am

Random Poster wrote:
Wed Sep 12, 2018 8:04 am
curmudgeon wrote:
Tue Sep 11, 2018 12:08 am
I spent a lot of time playing with calculators and tax software looking at this.
Could you recommend which calculators you used?

Or, alternatively, a comprehensive resource that explains all of the details of the various ACA offerings, the tax implications of each, and how to make sense of it all?
If you are of a certain generation, maybe you remember "you are in a maze of twisty passages, all alike". Navigating the finer details of ACA can feel like that. I found that my state (CA) "shop and compare" tool did a good job of showing premiums and estimated subsidy for the various plans; there are a lot of different tweaks based on your specific location and the plans available there, and it seemed to get those right (it was a little clumsy about doing "what ifs" for different income levels, but not too bad. The actual ACA signup process was a nightmare, even after several years of operation, but that's a different story.

For basic tax estimation, I tend to use https://www.mortgagecalculator.org/calc ... ulator.php

To actually get down into the weeds with the ACA details, I take last years tax software (TurboTax in my case) and do dummy returns to evaluate various effects. This works pretty well when things are stable from year to year; you just note to yourself where inflation adjustments move some boundaries. It's more of a challenge when there are major changes, but mapping it out as best you can is all you can do (and consult the wisdom of bogleheads).

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Re: Fine tuning income around the ACA cliff

Post by Random Poster » Wed Sep 12, 2018 10:00 am

curmudgeon wrote:
Wed Sep 12, 2018 9:45 am
If you are of a certain generation . . . .
Thank you for the information.

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